VAT on school fees – key steps for independent schools

Posted: 16/10/2024

Following on from the Chancellor of the Exchequer’s statement on 29 July, and the technical guidance published on the same date, this article sets out below what is now known about the introduction of VAT on independent school fees. 

What supplies will become VATable?

VAT will apply to school fees and vocational training supplied by an independent school from 1 January 2025. The VAT charge will apply for any fees paid after 29 July 2024, where the payment relates to tuition on or after 1 January 2025. The VAT charge will also apply where the tuition or vocational training is supplied by a ‘closely connected person’.

VAT will also be charged on boarding and lodging fees where the accommodation is provided by the independent school or a ‘closely connected person’.

Extra-curricular activities that are educational in nature will be subject to VAT. This includes sports and performing arts classes after normal school hours but does not extend to after school and wraparound care that is not educational in nature, including holiday clubs. These will remain exempt as ‘welfare services’. 

What is excluded from the charge?

‘Closely related’ goods and services such as school meals, transport, exam fees, wraparound care (as mentioned above), stationery and books will remain exempt from VAT, provided that the provision of these goods and services is not treated as a single supply of education. This would require schools to make a separate charge for these items. 

What about nurseries and sixth form education?

The VAT charge will apply to the provision of education to children of compulsory school age. 
Nurseries will therefore remain within the VAT exemption, with VAT only being charged from reception onwards. The charge will, however, be extended to sixth forms attached to independent schools, and standalone sixth form colleges providing education for 16 – 19 year olds outside of the state sector.

What about education for SEN pupils? 

A limited provision has been made for special educational needs (SEN) pupils, but only in cases where a placement in an independent school is necessary to meet the pupil’s needs and the school is named in the education, health and care plan (EHCP) with the local authority funding the place. Local authorities will be able to recover the VAT charged on the fees for pupils that are paid by funding, and parents and carers of pupils funded in this way will not be impacted. 

However, where a parent or carer has decided to send a SEN child to an independent school without a formal plan in place, or where the EHCP concludes that the child’s needs could be met in the state sector, VAT will apply to the fees and this will not be recoverable. 

What about fees paid under a ‘fees in advance’ scheme?

Pre-payments of fees made prior to 29 July 2024 relating to tuition or vocational training to be provided after 1 January 2025 may be subject to challenge, unless a VAT point was clearly created under general VAT rules. The technical guidance refers to a requirement that the payment was made on behalf of a named pupil and that the term being paid is clearly specified in the advanced fees agreement. Further guidance is anticipated on this. 

Is VAT the only additional cost for independent schools?

The charitable rates relief for business rates will be removed for independent schools. The government is consulting schools with a high SEN provision where some relief may still be available going forwards. 

Will VAT become recoverable on previous capital expenditure?

As mentioned in our first bulletin on the introduction of VAT for independent schools, under current VAT rules, expenditure incurred on large building projects (over £250,000 of expenditure) is subject to a 10-year adjustment period. If the VAT status of the entity that incurred the expenditure changes during the 10-year period, VAT may become recoverable on the project, even if it was not when the project was undertaken. The technical guidance does not mention HM Treasury’s position on whether this will be available for independent schools and without specific exclusion in the legislation, it appears that the general principles will apply. 

What next?

The next steps for schools are as follows:

• prepare a calculation of the additional costs, taking into account the VAT charge against the VAT the school incurs which will become recoverable;
• make a decision about how much of the VAT costs to pass on to parents and communicate this – there is no set rule, and schools are taking different approaches here;
• undertake a calculation of any large capital expenditure incurred within the last 10 years; and
• register for VAT. Registration is open from 30 October. 

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